This is “Outsourcing and Lock-in”, section 10.5 from the book Creating Services and Products (v. 1.0).
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OutsourcingA contractual relationship between one business and another. is a contractual relationship between one business and another. The outsourcee, the company trying to outsource some organizational function, can have the outsourcer company provide manufacturing, product design, product distribution, IT services and infrastructure support, and about everything else including strategic planning support. There are many reasons why companies turn toward outsourcing, including reducing costs, access to expertise, and increased production capacity, as illustrated in Note 10.5 "Benefits of Outsourcing".Belcourt (2006), pp. 269–279. At the same time, there are many reasons that outsourcing can create problems as illustrated in Note 10.6 "Risks of Outsourcing". There is, however, one major reason that outsourcing creates problems. Outsourcing causes the organization to lose its absorptive capacity in the area that was outsourced. As noted in an earlier chapter, having absorptive capacity means that a company is able to evaluate new technological development because the company or the owner has insight and expertise into a particular area. Organizations with absorptive capacity have developed knowledge structures and insight in a particular domain. Having absorptive capacity gives an organization the ability to understand, assimilate and exploit new knowledge and information, and then to apply it to solving problems and developing commercially viable products. If an organization outsources an ability or capability, which is a core competency, then the organization may not be able to understand and recognize when an emerging technology is important. In the worst case, the organization may not be able to develop products because it does not have the know-how since it has already lost the ability to learn-by-doing and learn-about.
Costs may be greater than anticipated.